Investors finally punt on Crown jewel

NEWS this week that Crown's Macau joint venture is under investigation for allegedly funnelling $170 million worth of illicit gambling funds from Taiwan to Macau may not have affected the share price of James Packer's casino operator, but it does highlight the risks it faces from a business that will increasingly define its fortunes.

Until now, Crown has had trouble getting the local market to appreciate the value of its investment in Melco Crown, but a 50 per cent rise in Crown's share price since last April shows investors are finally coming around to the fact that the contribution from Macau cannot be ignored.

More than dumb luck: Crown has actively targeted Macau's mass market and not just the VIP play. Photo: Bloomberg

Citi forecasts the investment will account for 39 per cent of Crown's net profit for this financial year, up from 6 per cent just two years ago.

Melco Crown's good fortune is more than just dumb luck.

The company has actively targeted Macau's mass market - and not just the VIP play, which dominates the gambling enclave but experienced little growth in the December quarter.

It means its business is dominated by a segment that was still growing 30 per cent for the December quarter, and on much stronger margins than the high rollers who tend to come with hefty commissions for the junket operators needed to attract them.

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Citi estimated profit margins on VIP players may be as little as 9 per cent compared with the mass market where margins are 35 to 40 per cent.

The Taiwanese investigation into the Melco Crown subsidiary - which allegedly involves illegally circumventing the country's tight foreign-exchange controls to allow high rollers to get their gambling money to Macau - highlights other potential risks of the VIP market.

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For now, the only proven blemish on Crown's record will come from its siege of the rival casino operator Echo Entertainment.

While Crown has soared over the last year, Echo has lost some of the takeover premium priced into the stock when Crown, and then Malaysian casino operator Genting, acquired shares in it last year.

Now that Packer has shown his hand with plans to separately acquire a casino licence for his luxury hotel at Barangaroo, the value of his stake in Echo may have lost as much as $70 million during the December half, according to analyst estimates.

The decline of Echo's share price is not necessarily a reflection on the company, which has finally demonstrated it is more than a sitting duck for Packer.

The company has overhauled its boardroom, and found itself an experienced chief executive in Las Vegas veteran John Redmond, who formally took the reigns on Friday after receiving the necessary regulatory approvals. He will step down as a non-executive director of Echo to take the post.

The redevelopment plans for Sydney's Darling Harbour precinct will also help the cause of Echo's flagship asset, the Star, which has spent hundreds of millions of dollars to entice VIP gamblers, and the mass market, through its doors.

The big question is whether Echo's new CEO will stick with the return targets on Echo's massive investment in the Star now that the CEO, and chairman, who set the targets have departed.

For other players in the gambling industry it could be a tougher year ahead.

Merrill Lynch says the loss of the rugby league sponsorship by Tabcorp's Sportsbet to upstart Tom Waterhouse indicates the company's profit margins may be under threat from costly new competitors.

He said the threat of online competition will continue to intensify over the next one to three years with Tom Waterhouse's $10-million-a-year deal with the NRL giving some indication of the ''significant cost inflation'' facing Tabcorp.

The impending market entry of one of Britain's largest bookmakers, William Hill, via its acquisition of Sportingbet, will also introduce a rival with deep pockets and what appears to be aggressive expansion plans in Australia.